N.Y. Fed joins investors demanding Bank of America buy back mortgages

Oct. 19 (Bloomberg) -- Lisa Welch of MFC Global Investment Management speaks with Bloomberg's Lisa Murphy about the outlook for Bank of America Corp. and the prospects for mortgage buy-backs. Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, according to people familiar with the matter. (Source: Bloomberg)
By Jia Lynn Yang and Steven Mufson
Washington Post Staff Writers
Tuesday, October 19, 2010; 11:54 PM

The Federal Reserve Bank of New York has joined a group of investors demanding that Bank of America buy back billions of dollars worth of mortgage securities that are plagued with shoddy documentation and lending standards, according to people familiar with the matter.

Some of the most powerful investment groups in the country as well as the New York arm of the central bank are accusing one of Bank of America's major mortgage divisions of cutting corners when it was issuing mortgages during the housing boom and as it has been foreclosing on struggling borrowers during the bust.

If Bank of America refuses to comply, these investors could end up suing, a person familiar with the matter said.

The demand from the New York Fed and other investors sets up an unusual and high-stakes confrontation, pitting an arm of the federal government against the country's biggest bank. It also illustrates conflicting policy priorities, because it could put the Fed at odds with a bank the Treasury Department has been helping through the financial crisis over the past two years.

With this new confrontation, the government finds itself in the awkward position of being an unhappy private investor pressing for its rights to be enforced. The New York Fed holds roughly $16 billion of mortgage securities that it acquired after it bailed out American International Group.

On Tuesday, Bank of America dismissed concerns that investors will drag the bank into court for years with costly lawsuits.

"We don't see the issues that people [are] worried about, quite frankly," chief executive Brian Moynihan said in a conference call Tuesday as the bank reported a $7.3 billion third-quarter loss.

But against a backdrop of accusations that banks did not properly foreclosure on homes, a growing number of bondholders are ramping up attempts to recoup their losses from mortgage securities they bought from banks. These securities plummeted in value as home prices dropped and a massive wave of borrowers fell behind on their payments.

Attorneys for the group of investors say that affiliates of Countrywide Financial, which was bought by Bank of America in 2008, failed to service 115 pools of loans as promised after the investors bought a large swath of $47 billion worth of mortgage loans.

These investors, which also include Blackrock, Prudential, MetLife and Pimco, argue the banks have not kept accurate paperwork on the loans that were sold, a charge being investigated across the nation as details have emerged that banks may have taken shortcuts to save money and time. These concerns have prodded a handful of banks, including Bank of America, to temporarily halt foreclosure sales.

The big investment firms - which manage funds from endowments, pension funds and others - say they have also been upset that Treasury and the banks have been too quick to restructure mortgages, which hurts investors. Yet the department has left largely untouched consumer debt and home equity loans owed to the same big banks at the heart of the lending and foreclosure debacles, according to a senior executive at one of the investment companies.

Now that new document problems have emerged, one senior executive said, investors are able to allege that Countrywide didn't even own the mortgages it sold and was in violation of local real estate laws. As a result, he said, Bank of America is responsible for repurchasing the securities from investors.

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